Completed acquisitions by Tesco plc of the Co-Operative Group's stores in Uxbridge Road, Slough as well as Stapleford Lane, Toton, Nottingham and Towers Place, South Shields.

Affected market: Supermarket

No. ME/1344/03

The OFT's decision on reference under section 22 given on 2 February 2004

PARTIES

Tesco plc (Tesco) is part of Tesco Group.  Tesco Group operates grocery stores in Europe, Asia and the UK, which also sell some non-grocery items, including petrol, tobacco and newspapers.  Tesco Group's turnover in the year ended 23 February 2002 was £25.654bn and its profit before tax was £1.201bn.  Tesco is the largest grocery retailer in the UK.

The Co-operative Group (the Co-op) operates a variety of retail operations and services in the UK, including grocery retailing.  The Co-op's turnover in the year ended 11 January 2003 was £7.776bn and its loss before tax was £66.2m.

TRANSACTION

Tesco acquired a Co-op store in Uxbridge Road, Slough on 10 October 2003 (the Slough acquisition).  One reason for doing so was to facilitate the renovation of Tesco's existing site in Slough over a number of months without loss of a Tesco store for a period in Slough.  Following a complaint from local consumers, the OFT launched an investigation into this acquisition.  Tesco had previously acquired Co-op stores in Stapleford Lane, Toton on15 November 2002 (the Toton acquisition) and in Towers Place, South Shields on 4 July 2003 (the South Shields acquisition).

JURISDICTION

As a result of each of these transactions, Tesco on the one hand, and a Co-op store on the other, have ceased to be distinct.  The OFT believes that, save for the application of section 24 of the Enterprise Act 2002 (the Act) (discussed below), each of the 3 acquisitions constitutes a relevant merger situation under section 23 of the Act.  This is because (i) each Co-op store can be considered an 'enterprise' for the purposes of this section; and (ii) each acquisition is likely to qualify for investigation under the share of supply test.

Section 24 of the Act in principle excludes the Toton and South Shields acquisitions from the purview of the Act, as more than four months have elapsed since completion and since the respective relevant material facts were so publicised as to be generally known or readily ascertainable.  The OFT therefore considered whether to treat these two earlier acquisitions as having occurred simultaneously on the date on which the latest of them occurred, i.e. the Slough acquisition, under section 27(5) of the Act.

In considering whether to exercise its discretion under section 27(5) of the Act in this case, the OFT took account of the following:

• that each transaction was or is a relevant merger situation
• that each transaction involved or involves the acquisition of a single Co-op store in a different (non-proximate) local area within the UK; and
• that we have found no basis for concluding that these transactions were structured so as to avoid scrutiny under the merger control provisions of the Act or, previously, the Fair Trading Act 1973; in this respect, we observe that each transaction was contemplated at a time prior to the completed investigation and report by the Competition Commission (CC) on the proposed acquisition of Safeway (Cm 5950; the CC Report).

In these circumstances the OFT has decided not to exercise its discretion under section 27(5) of the Act with respect to the Toton and South Shields acquisitions. These transactions will, therefore, not be considered further.

The parties overlap in the supply of groceries, in particular one-stop shopping as defined in the CC Report, and the share of supply test in section 23 of the Act is met for the Slough acquisition.  A relevant merger situation has, therefore, been created by this acquisition.

RELEVANT MARKET

The CC Report concluded that one-stop shopping in grocery stores of 1,400 sq. m. and above constituted the relevant frame of reference for the purposes of its inquiries.  This is because most consumers visit such stores to carry out their main weekly shop.  The nature and size of the Co-op store at Slough falls clearly within the CC's definition of a one-stop store.

The CC Report also concluded that the geographic frame of reference for one stop shopping is essentially local, because most consumers are prepared to travel only a limited distance for their main grocery shop.  In addition it also found, however, that there are national aspects to competition between, and buyer power of, the major supermarket chains.

In evaluating the local issues, the CC Report used isochrone analysis based upon drive time from a specific store or population centre to examine the impact of the merger situation.  In the first instance any reduction of fascias among the main competitors to four or fewer was defined as a potential problem.  Following further submissions from the parties, however, this was relaxed to a criterion of a reduction to three or fewer fascias and a number of other refinements were made to the methodology.

The CC Report notes (at para 2.196) that 'Safeway was already well advanced on an isochrone analysis for its own commercial purposes, using mapping software that we had already separately concluded would produce reliable and robust results.'  The exercise was therefore carried out by Safeway staff based on Safeway's mapping software, subject to independent audit.  Store network data was provided to Safeway by each retailer via the CC.  The CC decided on the parameters for the analysis.

The accuracy of the Safeway-based approach was tested by an independent auditing firm, Geobusiness, using its own software but the same assumptions.  For a sample of forty stores this produced different results in eight cases and these were due to extremely small differences.

As a starting point for examining the local issues in the current transaction there would seem to be no strong reason for departing from the approach and criteria used in the CC Report.  We therefore invited Tesco and the key supermarket operators to comment on the transaction in these terms.

In practice, however, there are difficulties for the parties and for third parties (except for Safeway) in conducting analysis on exactly the same basis as the CC, not least because they do not have access to the Safeway software.  Given how sensitive the isochrone analysis is to the software and assumptions, this means that, in this case and in similar cases in the future, we can expect to be presented with a range of results.

HORIZONTAL ISSUES

Local competition

The majority of submissions to us suggest that the Slough acquisition may give rise to a substantial lessening of competition in line with the isochrone analysis in the CC Report.

Tesco has made two principal submissions to the contrary. The first is that the CC cleared the acquisition by Tesco of the Safeway store in the same area in the Safeway investigation.  The Slough acquisition is, however, a separate merger situation involving a different target store.  The second is that the analytical framework laid out by the CC is exceptionally marginal when applied to the Slough Co-op store.  Nevertheless, the CC's recently promulgated isochrone rules are a clear methodology for analysing local one-stop supermarket competition.  In the present circumstances, we do not believe we should depart from the application of the CC's isochrone analysis.

This isochrone analysis and most third party analyses point to the conclusion that the Slough acquisition raises competition concerns, as identified in the CC Report, by reducing from four to three the number of competing fascias in the relevant local area.

National concentration and buyer power

The CC Report considered the impact of the acquisition of the entirety of Safeway's store portfolio by the various bidders on competition between, and purchasing power of, the supermarket chains at the national level.  As this case involves the acquisition of a single Co-op store, the transaction's impact in these respects is likely to be marginal.

Barriers to entry and expansion

The CC Report sets out that barriers to entry and expansion are high for large grocery outlets.  We have not received any evidence which would warrant departing from this conclusion.

Buyer power

Since the vast majority of supermarket customers are individuals, countervailing buyer power is unlikely to be an issue in this acquisition.

Counterfactual

Tesco has urged the OFT to employ a counterfactual other than that of pre-merger competition, i.e. the continued operation of the Slough store by Co-op.  However, even if we assume that Co-op was certain to sell the Slough store (absent its acquisition by Tesco), we would be obliged to speculate as to the most likely substitute buyer (from among numerous plausible candidates) and whether that buyer might raise competition concerns comparable to those identified here.  In the absence of sufficiently clear evidence on these points, we accordingly consider pre-merger competition to be the appropriate counterfactual.

VERTICAL ISSUES

The acquisition appears to raise no vertical issues.

THIRD PARTY VIEWS

A number of third party competitors and suppliers expressed concern, consistent with the consumer complaints that prompted the OFT's investigation.

ASSESSMENT

The acquisition of the Co-op store in Uxbridge Road, Slough has resulted in an increased concentration and reduced customer choice in a local market that is already highly concentrated.  Potential entry cannot confidently be relied upon to avert a lessening of competition.  No concerns at a national level arise as a result of this acquisition.  The OFT, however, believes that there is a significant prospect that this merger would substantially lessen competition at the local level.  That is a sufficient condition for the OFT to refer the merger to the CC.  To reach a reference decision in this case, therefore, it has not been necessary to assess the merger further in relation to the interpretation of the test for reference given in the recent judgment of the Competition Appeal Tribunal (CAT) in IBA Health v OFT [2003] CAT 27.  Moreover, while the affected area would be Slough and the surrounding area, the affected sector appears to be sufficient important to justify reference, given the total expenditure on groceries at one-stop stores in this area.

UNDERTAKINGS IN LIEU OF REFERENCE

Where the duty to make a reference under section 22(1) of the Act is met, pursuant to section 73(2) of the Act the OFT may, instead of making such a reference, accept from such of the parties concerned undertakings to take such action as it considers appropriate for the purpose of remedying, mitigating or preventing the substantial lessening of competition concerned or any adverse effect which has or may have resulted from it or may be expected to result from it.  The OFT has therefore considered whether there might be undertakings in lieu of reference which would address the competition concerns outlined above.  The OFT's guidelines on undertakings in lieu of reference state that, 'undertakings in lieu of reference are appropriate only where the competition concerns raised by the merger and the remedies proposed to address them are clear cut.'  The OFT has also considered the recent judgment of the CAT in IBA Health Ltd v OFT [2003] CAT 27.

The concerns in this case are sufficiently clear cut, particularly taking into account the CC Report.  By way of remedy, Tesco has said that it would sell the former Co-op store in Uxbridge Road, Slough.  Indeed, a rationale for this merger is that it would enable Tesco to trade from the Co-op store premises while its own store in Slough is being renovated.  Tesco's proposal appears to the OFT to be a clear-cut remedy as it directly addresses the competitive overlap between the parties' activities in Slough.  This remedy could also be implemented within a reasonable period of time.  Accordingly, the OFT has decided to exercise its discretion to seek undertakings in lieu of reference.

DECISION

The acquisition of the Co-op store in Uxbridge Road, Slough will therefore be referred to the Competition Commission under section 22(1) of the Act unless Tesco gives suitable undertakings pursuant to section 73 of the Act to address the competition concerns outlined above.

NOTES

1.The CC Report applied a detailed framework for investigating potential local competition concerns that may arise in certain supermarket mergers involving one-stop grocery shopping, as discussed further at paras. 8ff below.

2. Ibid at para. 8.3.

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